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Topline

Concerns are rising that the Federal Reserve’s eventual withdrawal of its unprecedented support from the U.S. economy will dampen the major boom experts are expecting at the end of this year as the economy reopens, but Bank of America says you shouldn’t worry just yet. Here’s why.

Key Facts

First, there’s a lot more stimulus spending ahead as the Biden Administration prepares to unveil a multitrillion-dollar infrastructure plan, the experts say, not the mention the fact that much of the funding from the $1.9 trillion American Rescue Plan and preceding stimulus bills is continuing to work its way through the economy.

Second, the Fed has repeatedly signaled that it will not raise interest rates anytime soon—and when it does, it will do so slowly and with plenty of advance warning.

Many investors fear that the inflationary pressures likely to come along with the recovery boom could force the Fed to withdraw support more quickly and rattle markets, adding even more instability to an already precarious situation.

Bank of America’s experts don’t expect the Fed to touch interest rates until the end of 2023, even if inflation rises above its 2% target, and they expect the Fed to wait until next year before easing off of its pandemic bond-buying program.

Last, Bank of America argues that after a downturn, a recovery tends to build enough momentum to be self-sustaining even after fiscal and monetary support dries up.

Crucial Quote

“While we welcome these positive developments, no one should be complacent,” Federal Reserve chair Jerome Powell said last week, referring to the fact that the economic recovery is progressing much faster than many expected, especially when it comes to household spending, manufacturing and the housing market. “At the Fed, we will continue to provide the economy the support it needs for as long as it takes.

Big Number

$1.6 trillion. That’s how much extra money households saved last year thanks to business closures, restrictions and lockdowns. Experts expect some—but not all—of those excess savings to help fuel a dramatic uptick in consumer spending later this year.

Tangent

In another sign of confidence in the recovery, the Federal Reserve announced Thursday that it will end restrictions on dividend payments and share repurchases for most banks on June 30. The restrictions were put in place last year to ensure that banks had enough capital on hand to see them through the coronavirus crisis.

Key Background

The U.S. economy contracted 3.5% in 2020 as the coronavirus pandemic forced business closures and lockdowns and left millions unemployed, but a robust vaccine program and the recent passage of President Biden’s $1.9 trillion American Rescue Plan led the Organization for Economic Cooperation and Development to predict 6.5% GDP growth in 2021. 

Further Reading

$1,400 Stimulus Checks Are Already Working As Credit, Debit Spending Surges 45%, BofA Says (Forbes)

Covid-19 Recession: 10 Important Numbers That Sum Up America’s Economic Crisis One Year Later (Forbes)

Powell And Yellen Praise Aggressive Stimulus Spending, Acknowledge Incomplete Economic Recovery In Congressional Testimony (Forbes)

Federal Reserve Looking Ahead To Higher Inflation As Economy Rebounds, But It Won’t Raise Rates Yet (Forbes)